This article is from the Australian Property Journal archive
MELBOURNE CBD’s office vacancy has lifted again, hitting 13.8%, although a major pre-commitment at a $1.5 billion project will provide a boost for the market.
The Property Council of Australia’s latest half-yearly Office Market Report showed the CBD’s vacancy rate lifted from 12.9% over the six months to January as the city’s recovery from multiple COVID lockdowns continued to lag other states’.
The CBD market is very different to that of three years ago. On the eve of COVID, Melbourne’s office market vacancy was at just 3.2%. Now, Property Council data shows occupancy has only just lifted to 57% towards the end of last year.
Tenant demand for 2022 was similar to 2021, at circa 350,000 sqm according to CBRE.
A big part of the vacancy story has been new supply, and a sizable 220,000 sqm of new space is expected in the CBD over the next two years. While 2022 saw only a refurbished 25,100 sqm come online, the previous two years had seen a whopping 500,000 sqm of new developments reach completion in the CBD and fringe.
In a boost for the market, Charter Hall yesterday announced that Allianz Australia was the latest major tenant secured for its $1.5 billion, twin-tower 555 Collins Street tower in the CBD, which is due for completion in June.
Allianz committed to 6,500 sqm across levels 24 to 28 within the 84,000 sqm project, and will join Amazon, which committed to anchor the first tower within the project, while Aware Super has committed to six floors. The development attracted the investment of Singapore’s sovereign wealth fund GIC in August.
“Despite global headwinds we anticipate the Victorian office leasing market will continue to improve in 2023 as larger tenants, who have delayed their property decisions over the last couple of years, gain confidence in their size and needs and action their property requirements,” said Ashley Buller, head of office leasing, CBRE Victoria.
Demand remains high in the smaller tenant cohort – the sub-1,000 sqm category – which represented a large percentage of leasing demand within the CBD market in 2022. The emergence and demand for speculative suites has demonstrated a trend of tenants returning to the workplace and an appetite for organizations to provide a new fit-out to entice employees back to the office. The sub-500 sqm remained strong with the majority of deals taking place in fully-fitted spec suites, with many of these tenants relocating from co-working space, Buller said. Spec suites continued to be built across the market throughout the year, however due to inflationary pressures it became more difficult to stack up in the second half.
Buller said the flight to quality trend seen in the last couple of years has been focused around premium and A-grade space. This broadened to B and C-grade buildings, with tenants stepping up between grades causing more broad-based demand across the market.
CBRE data shows Docklands secured the greatest percentage of the larger transactions against other precincts in Melbourne in the second half of 2022.
“This precinct secured strong activity from centralisation tenants and tenants capitalising on attractive deal metrics coupled with good quality existing fit-outs,” Buller said.
While Melbourne’s sublease space is above the historical average, sublease space decreased in 2022 by 0.7% and is anticipated to further retract throughout 2023, said JLL’s joint head of office leasing – Victoria, James Palmer.
Fringe driving recovery
Palmer said Melbourne’s fringe office market – including Richmond, Cremorne and St Kilda Road – continues to drive the recovery story nationally, recording the highest level of net absorption for a second consecutive year.
In 2022, net absorption of more than 80,000 sqm was recorded, on the back of more than 100,000 sqm in 2021. Strong demand across all size cohorts was likely attributed towards the strength of the local economy, which remains somewhat protected from global economic headwinds, Palmer said.
Only a handful of new buildings enter the market this year with a significant spike developing in 2025 as developers catch up from the COVID lag. Ben McKendry, Cushman & Wakefield’s national director, head of metropolitan leasing, office leasing, Victoria, said this will put upward pressure on rents and incentives should stabilise.
St Kilda Road is facing historically high vacancy as companies take advantage of market conditions to upgrade, but buildings close to the under-construction Anzac Station will continue to lease well due to increased amenity and owners investing in major building refurbishments, McKendry said. There are also signs residential conversion is starting to ramp up again, which will help remove secondary stock from the market.
